Bailed-out Ireland reopens for business

The Irish finance minister explains why his country is first to exit its
rescue scheme

One in five residential mortgages, with a total value of €18.9bn, is in arrears over 90 daysPhoto: Reuters

By John Walsh

4:00PM GMT 14 Dec 2013

Today, Ireland is the first eurozone country to exit the EU-IMF bail-out programme.

The national mood is relief, as Ireland has earned widespread plaudits for restructuring its economy over the past three years.

Even the IMF’s managing director, Christine Lagarde, has heaped lavish praise on the finance minister, Michael Noonan, of Fine Gael.

In an interview with The Telegraph, he is clear about future priorities. “First of all, we must stop adding to the stock of debt each year and continue to reduce the deficit. [Next year] will see us moving to a primary balance or even a small primary surplus and this is significant,” he said. “We will continue to reduce the deficit in the years ahead.

“Secondly, the proceeds of the sale of banking assets will be used to reduce the debt further. Thirdly, we will explore every opportunity to reduce the debt at EU level. And finally, the key to all of this is growth.”

Back in 2006, Ireland was posting one of the highest growth rates among OECD countries. Then came the banking meltdown and a property crash that left the country near-bankrupt.

Relentless pressure on Irish bond yields from September 2010 onwards forced the government into a humiliating EU-IMF bailout programme on November 29.

Where Ireland stands now relative to three years ago is a matter of much debate.

On the plus side, the country is exiting the bailout programme without the safety net of a precautionary credit line. Irish bond yields fell from less than 16pc in 2011 to less than 4pc for most of 2013. The government used these relatively benign conditions to stuff the national coffers with €21bn (£17.7bn) in cash. The economy is pre-funded up to 2015.

The fiscal deficit soared to 32pc of GDP in 2010, bloated by a one-off rescue of the banking system. It is projected to reach 7.3pc by the end of this month.

Surging exports have helped Ireland post current account surpluses since 2010. Earlier this month, Forbes named Ireland the best place in the world for business.

But problems remain. Debt is forecast to peak at 123pc of GDP this year. It was 25pc of GDP in 2007, but a €64bn banking rescue changed that.

One in five residential mortgages, with a total value of €18.9bn, is in arrears over 90 days. Unemployment is falling faster than expected, but it is still a hefty 12.5pc.

Personal debt peaked at €203.8bn in 2008, but is still a whopping €176.9bn for a country of 4.6m people.

Possibly the biggest challenge is the future of the European Monetary Union.

Macroeconomic imbalances and artificially low interest rates for the first decade of the single currency fuelled credit bubbles in Ireland and other periphery countries. The inability to devalue the currency meant the subsequent adjustment was achieved through a very painful internal devaluation.

Noonan says reforms have been introduced to stop “boom and bust” recurring. “The [EU Commission’s new budget rules] and the fiscal stability treaty, the establishment of the ESM [European Stability Mechanism], and the major efforts by the ECB [European Central Bank] to do whatever it takes to safeguard the currency all support Ireland’s recovery.

“The economic and monetary union is strengthening, the banking union project is moving forward and Europe is stronger as a result.

“The Irish people have had to make huge sacrifices as a result of the damage caused by the boom and bust cycle.

“Consolidation measures totalling €30bn have been introduced since 2008 in order to get us back on track."

The government set up the Irish Fiscal Advisory Council, to guard against inappropriate fiscal policy in the future. In its last report, the council said that if growth came in under 2pc in 2014, then the government would be forced to implement budget cuts greater than the planned €2bn next October. However, another tough austerity budget will be a very hard sell to the electorate.

“Look, there is no one in Ireland suggesting that the job is completed. Exiting the bail-out is significant, but it is not the end in itself. We will continue to grow the economy, to create jobs and to reduce the deficit.

“We have beaten our deficit target each year since 2011; this has built confidence in the government’s approach and this [has] attracted investment into Ireland.”

In agreement with the troika of lenders [the IMF, the European Commission and the ECB] the government has agreed to reduce the deficit below 3pc by 2015.

There were six domestic banks at the onset of the crisis. Now there are three – Bank of Ireland, AIB and Permanent TSB. The latter two are 99.8pc state-owned.

All three face a rigorous health check as part of the proposed EU Banking Union.

“The market reaction to the exit confirmed that it was the right decision,” Noonan said. “2013 is the right time for Ireland to exit the bailout and make a full return to normal market funding.”